capital gains new

8/7/2019 capital gains new

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Unit III

Capital Gain


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Capital & Revenue Receipts

Capital Receipts Revenue Receipts

(a) Receipts derived from activities which arenot part of the normal trading activities ofthe business

(a) Receipts related to NORMAL ACTIVITIES ofthe business

(b) Receipt on account of fixed capital isCapital Receipt

(b) Whereas a receipt on account of circulatingcapital is Revenue Receipt

(c) Appears as capital or liabilities in theBalance Sheet

(c) Credited as revenue to Trading and Profit &LossAccount

(d) Capital receipt is an amount received asfixed capital

(d) Receipt in place of income is a revenuereceipt.

(e) Examples: receipts of cash brought in bypartners, shareholders, debenture holdersand bank loans

(e) Examples: receipts from sales of goods andservices, rent, commission and interest onbank deposits received by the business.


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Capital Gains

y Basis of Charge: [ 45 (1) ]

Any profits or gains arising out of the transfer of a capitalasset effected in the previous year shall be chargeable to

income-tax under the head Capital Gains and shall bedeemed to be the income of the previous year.. Unless it isexempt under section 54, 54B, 54D, 54EC, 54F, 54G and54GA.


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Capital Assets

y Capital Asset however does not include

y Stock inTrade

y personal effect such as movable property except jewelry

y

agricultural land in Indiay Gold Deposit Bonds issued under the Gold Deposit Scheme

1999.

However, capital asset includes property of every kind

whether tangib

le or int

angib

le..


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Types of Capital Assetsy Short Term Capital Assets

y Long Term Capital Assets

Short Term Capital Asset as per section 2(42A) is a capitalasset held by an assessee for not more than 36 months.However, in case ofa) Equity or Preference shares held in theCompany b) Any listed security. 3) Units of UTI or MutualFund Units under Section 10 (23D) , the assets held for less

than 12 months will be Short Term Capital Assets..y The Capitalassets not fulfilling the above criteria will be

treated as Long Term Capital Assets.. 2(29A).


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Transfer includes.

1) Sale

2) Exchange

3) Relinquishment of the asset/extinguishment of rights in an

asset4) compulsory acquisition thereof under any law

5) when Capital Asset is converted into stock in Trade.

6) when possession of property is foregone in discharge ofany

collateral contract under transfer of property Act.


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Transfer does not include.y Where the assets are distributed to the shareholders on liquidation, such

transfer will not be regarded as transfer in the hands of the Company.

y Any transfer by the company to its 100% subsidiary company provided the lateris an Indian Company.

y Any transfer in the scheme of amalgamation of a capital asset by theam

alg

am

ating comp

any to the

am

alg

am

ated comp

any.

y Any transfer by way of conversion of bonds or debentures, debenture-stock ordeposit certificates in any form, ofa company into shares or debentures of thatcompany.

y Any transfer under the security Lending Scheme,1997 for lending of anysecurities under an agreement or arrangement,which the assessee has enteredinto with the borrower of such securities and which is subject to the guidelinesissued by SEBI or RBI in this regard.Here , we are dealing only with taxation of corporate assessees therefore,aspects of Non-Corporate Taxation have been deleted from the material


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Computation of Short Term Capital

GainSr. No. Particulars Rs.

1 FullValue of Consideration xxx

2 (Less)a) Expenditure incurred wholly and exclusively inConnection with such a transfer.

xxx

(b) Cost of Acquisition xxx(c) Cost of Improvement xxx

3 Gross Short term Capital Gain xxx

4 (Less) Exemption, ifavailable u/s 54B, 54D, 54Gand54GA

xxx

5 Taxable Short Term Capital Gain xxx


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Computation of LongTerm Capital

GainsSr. No. Particulars Rs.

1 FullValue of Consideration xxx

2 (Less)a) Expenditure incurred wholly and exclusively inConnection with such a transfer.

xxx

(b) Indexed Cost of Acquisition xxx(c) Indexed Cost of Improvement xxx

3 Gross Long Term Capital Gain xxx

4 (Less) Exemption, ifavailable u/s 54, 54B, 54D, 54EC,54F, 54Gand 54GA

xxx

5 Taxable Long Term Capital Gain xxx


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Cost of Acquisition

y Cost of acquisition of an asset is the value for which it wasacquired by the assessee. Expenses of capital nature forcompleting or acquiring the title to the property areincludible in the cost ofacquisition.


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Indexed Cost of Acquisition ( Sec. 48)

y In the case of long-term capital gain, indexed cost ofacquisition and indexed cost of improvement are deducted.

y Indexed Cost of Acquisition means an amount which bears to

the cost ofacquisition, the same proportion as cost inflationindex for the year in which the asset is transferred bears tothe cost inflation Index for the first year in which the assetwas held by the assessee or for the year beginning on 01-04-1981 whichever is later.


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Cost Inflation IndexFinancial Year C I I Financial Year C I I

1981-82 100 1998-99 351

1982-83 109 1999-00 389

1983-84 116 2000-01 406

1984-85 125 2001-02 426

1985-86 133 2002-03 4471986-87 140 2003-04 463

1987-88 150 2004-05 480

1988-89 161 2005-06 497

1989-90 172 2006-07 519

1990-91 182 2007-08 551

1991-92 199 2008-09 582

1992-93 223 2009-10 632

1993-94 244

1994-95 259

1995-96 281

1996-97 305

1997-98 331


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Calculation ofIndexed Cost of

AcquisitionFair Market Value of the asset on April 1,1981 or cost of acquisition, which ever ismore X Cost Inf lation index for the year in

Cost inflation index which the asset is transferred


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Calculation ofIndexed Cost of

improvementCost of improvement (ignoring any costof improvement incurring prior to April1, 1981) X Cost inflation index for the year in

Cost inflation index for the year in whichimprovement took place

which the asset is transferred


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Example 1y X purchases a house property for Rs. 76,000 on June 30, 1967.

The following expenses are incurred by him for makingaddition/alteration to the house property:

y Cost of Construction of first floor in 1975-76 Rs. 1,10,000.

y Cost of Construction of Second floor in 1982-83 Rs. 4,40,000.

y Alteration/reconstruction of the property in 1989-90 Rs.2,90,000.

y Fair value of the property on April 1, 1981 is Rs. 6,50,000. The

house property is sold by X on June 15, 2009 for Rs. 75,00,000(expenses incurred on transfer Rs. 50,000)

Compute long term capital gain.


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Example 3

y X purchase a house property for Rs. 26,000 on May 10,1962. He gets the first floor of the house constructed in1967-68 by spending Rs. 40,000. he dies on september 12,1978. The property is transferred to Mrs. X by his will. Mrs.X spends Rs. 30,000 and Rs. 36,700 during 1979-80 and1984-85 respectively for renewal/ reconstruction of theproperty. Mrs. X sell the house property for Rs. 24,50,000on March 15,2010 (brokerage paid by Mrs. X Rs. 24,500).

The fair market value of the house on April 1, 1981 is Rs.2,68,000.

Compute long term capital gain.


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Example 4y

X purchases a property on April 1, 1976 for Rs. 95,000. He enters intro agreement forsale of the property to A on November 1, 1982 and receives Rs. 10,000 as advance. Acould not, however, keep his promise and the advance of Rs. 10,000 given by him isforfeited by X. Later on he gifts the property to his friend Y on May 15, 1984. Thefollowing expenses are incurred by X for renewals of the property:

y Addition of two rooms by X during 1978-79 Rs. 35,000.

y Addition of first floor by X during 1982-83 Rs. 45,000.

y Addition of Second floor byY during 1989-90 Rs. 1,25,000.

y Fair market value of the property onApril 1, 1981 is Rs. 2,45,000.

Y enters into an agreement to sell the property for Rs. 8,50,000 to B on April 1, 1994after receiving

an

adv

ance of Rs. 50,000. B cou

ld not p

ay the b

alance within thestipulated time of two months and Y forfeits the advance of Rs. 50,000 as per agreement

with B. Y ultimately finds a buyer in C to whom property is transferred for Rs. 23,75,000on December 1, 2009. Compute the capital gain chargeable to tax in the hands of Y forthe assessment year 2010-11.


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Example 5y X ltd. Owns the following assets:-

These capital assets are transferred by X ltd. to its wholly-owned Indiansubsidiary company S ltd. on April 1, 2008. On July 7, 2009, theseassets are transferred by S ltd. for consideration of Rs. 10,50,000 (i.e.Goodwill Rs. 6,00,000, Shares Rs. 2,15,700 and house property Rs.2,34,800). Compute the capital gain chargeable to tax in the case of Sltd. For the assessment year 2009-10.

Particulars Goodwill Shares (non-

listed)

House

property

Cost ofacquisition Self-Generated Rs. 1,38,600 Rs. 96,000

Date ofacquisition -- March 10, 2007 March 10, 2007


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Example 6y X, Y and Z are three partners of a firm. On March 10, 2010 the firm is dissolved. The

following assets are distributed to partners:

Determine the amount of chargeable capital gains of the firm for the assessment year 2010-11

Particulars Residential

House to X

Non-listed

shares to Y

Land to Z

Fair Market value on March 10, 2010 22,90,000 60,000 42,000

Agreed value as per dissolution deed 12,70,000 66,000 42,000

Cost ofacquisition 50,000 15,000 8,000

Year ofacquisition 1949-50 1992-93 1984-85

Fair Market value on April 1, 1981 3,20,000 N.A. N.A.


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Example 7

y X converts his capital assets (acquired on June 10, 1967 forRs. 70,000, fair market value on April 1, 1981: Rs. 1,80,000)into stock in trade on April 1, 1984 (fair market value: Rs.4,80,000) and, subsequently, sells the stock in trade soconverted for Rs. 7,30,000 on June 10, 2009. Determine theamount of Capital Gains and assessable profits.


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Example 8y The Central Government acquires a house property owned by X

on October 17, 1995. This property was purchased on April10,1976 for Rs. 76,000 (Cost of improvement incurred during1986-87: Rs. 40,000 and fair market value of the property onApril 1, 1981 was Rs. 1,42,000). The Government awards Rs.

5,77,000 as compensation which is received partly (Rs. 77,000)on May 13, 2009 and partly (Rs. 5,00,000) on April 1, 2010.Being aggrieved against the award, X files an appeal. The Court, asper order dated August 12, 2011, enhanced the compensationfrom Rs. 5,77,000 to Rs. 9,50,000 (legal expenses incurred by X:Rs. 20,000). X receives the additional compensation of Rs.

3,73,000 on April 15, 2012. Compute the income of X under thehead Capital Gains. Does it make any difference if the additionalcompensation is received by his sons A and B (share of each being50%) onApril 15, 2012 after the death of X?


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Example 9y X purchases a house property in 1995. It is compulsorily acquired

by the Government on April 20, 2008 (Indexed Cost ofAcquisition is Rs. 40,000). Compensation paid by theGovernment on May 6, 2009: Rs. 6,00,000. The Delhi High Court

increases the compensation from Rs. 6,00,000 to Rs. 9,30,000 onthe appeal filed by X ( legal expenditure incurred by X: Rs.10,000). The Government on June 10, 2011 pays the additionalcompensation of Rs. 3,30,000 but Government files an appeal inthe Supreme Court against the judgment of the Delhi High Court.The Supreme Court reduces the quantum of compensation fromRs. 9,30,000 to Rs. 7,50,000 by the judgment dated March 20,2013. X repays Rs. 1,80,000 to the Government on April 6, 2013.Legal expenditure incurred by X in Supreme Court is Rs. 25,000.


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Capital gains on transfer of bonus

sharesDifferent Situation Specified Provision

Cost of Acquisition of bonus shares allottedbeforeApril 1, 1981

Fair Market Value on April 1, 1981 is takenas cost ofacquisition

Cost of acquisition of bonus shares allottedafterApril 1, 1981

Cost ofacquisition is taken as zero

Period of holding Bonus shares The period of holding shall be determinedfrom the date of allotment of Bonus sharesand not from the date of acquisition oforiginal shares.


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Example 10

y X purchases 1,000 equity shares in A Ltd. @ of Rs. 16 pershare ( brokerage 1%) on December 10, 1979. He gets 500bonus shares (by virtue of his holding of 1,000 shares) onJanuary 10, 1984. Fair market value of shares of A Ltd. OnApril 1, 1981 is Rs. 24. On April 13, 2009, he transfers1,000 original shares @ Rs. 81 per share (brokerage 1.5%).

On April 15, 2009, he transfers 500 bonus shares @ Rs. 87per share (brokerage 1.5%). These shares are transferred in

the Bombay Stock Exchange.


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LTCG on transfer of securities not

chargeable to tax in cases covered by STT

y Conditions for exemptiony Taxpayer is an Individual, HUF, firm or company or any other

taxpayer.

y The asset which is transferred is a Long term capital asset.

y

Such asset is equity share in a company or units of equity orientedmutual fund.

y Such transactions takes place on or after October 1, 2004.

y At the time of transfer the transaction is chargeable to SecuritiesTransactionTax

y

If the above conditions are satisfied, LTCG is exempt from tax. Itmay be noted that in the cases given above the capital gain is shortterm capital gain, by virtue of section 111A, it is taxable @ 15%(+ SC + EC + SHEC).


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Example 11

y X holds 1,000 equity shares in A ltd. Since 1978 (cost ofacquisition Rs. 10,000, fair market value on April 1, 1981 Rs.16,000). A ltd. Offers 2,000 right shares of Rs. 10 each to Xon May 1, 2009 at a premium of Rs. 50. X subscribes for 800right shares and renounces 1200 shares in favour of C bytransferring the right entitlement for a consideration of Rs.4,800. X sells 1,800 shares in A ltd. On March 30, 2010 @Rs. 110 per share. C also transfers his 1,200 shares @ Rs.

111 per share on March 31, 2010.


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CapitalGains exemptfrom Tax


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Section 54y Who can claim exemption?

y Individuals/Hindu Undivided Family

y Which capitalasset is eligible for exemption?y Long-term

y Which specific asset is eligible for exemption?

y A residential house property

y Which capitalasset a taxpayer should acquire to get the benefit of exemption?

y Residential House Property

y Wh

at is time

limit for

acquiring the new

asset?

y For purchase: 1 year backward or 2 years forward

y For Construction: 3 years forward

y From which date the time limit shall be determined?

y From the date of transfer of house property, but in case of compulsory acquisition from the date of receipt of compensation

y How much is exempt?

y Investment in new asset or capital gain, which ever is lower.

y Is it possible to revoke the exemption in subsequent years?

y If the new asset is transferred within 3 years of its acquisition.

y When the exemption is revoked it is taxable in the year in which the default is committed. What will be the status of thenotional income?

y ShortTerm Capital gain

y Whether the scheme of deposit is applicable?

y Yes


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Scheme of Deposity If the new asset is not acquired up to the due date of submission of return of

income, then the taxpayer will have to deposit the money in Capital Gaindeposit account scheme with a nationalized bank. The proof of deposit shouldbe submitted along with return of income. On the basis of actual investmentand the amount deposited in the deposit account, exemption will be given to

the taxpayer.The taxpayer can acquire a new asset by withdrawing from the deposit account.But the new asset should be acquired as the time limit. If the deposit account innot fully utilized for acquiring the new asset, the unutilized amount willbecome chargeable to tax in the previous year in which the specified time limit

expires (but in case of section 54F it is unutilized amount/net consideration xcapital gains). It will be taxable as short term/ long term capital gain dependingupon the original capital gain. The unutilized amount can be withdrawn by thetaxpayer after the expiry of the aforesaid time limit.


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Section 54By Who can claim exemption?

y Individuals

y Which capitalasset is eligible for exemption?y Short Term/ Long-term


y Agricultural Land if it was used by the individual or his parents for agricultural purposes for atleast 2 years immediately prior totransfer.

y Which capitalasset a taxpayer should acquire to get the benefit of exemption?y Agriculturalland (may be in ruralareas or urban areas)

y What is time limit for acquiring the new asset?y 2 years forward


y From the date of transfer ofagricultural land

y How much is exempt?y Investment in new asset or capital gain, which ever is lower.






y Yes


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Section 54Dy Who can claim exemption?

y Any Person

y Which capitalasset is eligible for exemption?y Short Term/ Long-term


y Land or Building which is forming part ofan industrial undertaking which is compulsorily acquired by the Government and which isused for 2 years for industrial purposes prior to its acquisition.

y Which capitalasset a taxpayer should acquire to get the benefit of exemption?y Land or Building for industrial purposes

y What is time limit for acquiring the new asset?y 3 years forward


y From the date of receipt of compensation.

y How much is exempt?y Investment in new Capital asset or capital gain, which ever is lower.






y Yes


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Section 54ECy Who can claim exemption?

y Any Person

y Which capitalasset is eligible for exemption?y Long-term


y Any Long term capitalasset.


y Bonds of National Highway Authority of India or Rural Electrification Corporation

y Wh

at is time

limit for

acquiring the new

asset?

y 6 months forward


y From the date of transfer oflong term capital asset, but in case of compulsory acquisition from the date of receipt of compensation


y Investment in new Capital asset or capital gain, which ever is lower.


y If the new asset is transferred or it is converted into money or a loan is taken on security of the new asset within 3 years of itsacquisition.


y LongTerm Capital gain


y No


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Section 54Fy Who can claim exemption?

y Individual/Hindu Undivided Family

y Which capitalasset is eligible for exemption?

y Long-term


y Any Long term capitalasset (other than a residential house property) provided on the date of transfer the taxpayer does not own more than oneresidential house property (except the new house as stated below).


y A residential house property

y

What is time limit for acquiring the new asset?y For purchase: 1 year backward or 2 years forward

y For construction: 3 years forward


y From the date of transfer of capital asset, but in case of compulsory acquisition from the date of receipt of compensation


y Investment in new Capital asset/Net consideration x Capital gain


y If the new asset is transferred within 3 years of its acquisition, or

y Ifanother residential house is purchased within 2 years of transfer of original asset, or

y Ifanother residential house is constructed within 3 years of the transfer of original asset

y When the exemption is revoked it is taxable in the year in which the default is committed. What will be the status of the notionalincome?

y Short Term Capital gain


y Yes


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Section 54Gy Who can claim exemption?

y Any Person


y Short term/ Long-term


y Land, building, plant or machinery in order to shift an industrial undertaking from urban area to ruralarea


y Land, building, plant or machinery in order to shift an industrial undertaking from urban area to ruralarea

y What is time limit for acquiring the new asset?

y 1 year backward and 3 years forward


y From the date of transfer


y Investment in new Capital asset or capital gain which ever is lower

y

Is it possible to revoke the exemption in subsequent years?y If the new asset is transferred within 3 years of its acquisition.




y Yes


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Section 54GAy Who can claim exemption?

y Any Person


y Short term/ Long-term


y Land, building, plant or machinery in order to shift an industrial undertaking from urban area to any Special Economic Zone


y Land, building, plant or machinery in order to shift an industrial undertaking from urban area to any Special Economic Zone

y What is time limit for acquiring the new asset?

y 1 year backward and 3 years forward


y From the date of transfer


y Investment in new Capital asset or capital gain which ever is lower

y

Is it possible to revoke the exemption in subsequent years?y If the new asset is transferred within 3 years of its acquisition.




y Yes


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Example 12y X gives the following information:-

Residential House Property situated at Kolkata:

Date of Transfer December 30, 2009

Date of Purchase June 30, 1992

Sales Consideration Rs. 35,00,000

Cost of Acquisition Rs. 2,00,000Expenses on Transfer Rs. 40,000

Amount deposited in CapitalGain deposit account scheme on July 20,2010 Rs. 21,00,000

To get the exemption u/s 54, the following residential house property is purchased at Chennai by Xby withdrawing from the deposit account:

Date of Purchase June 20, 2011

Cost ofacquisition Rs. 15,00,000Find out the following:

a. Capital gains chargeable to tax for different assessment years;

b. X does not want to purchase or construct another property, what is the earliest date when he canwithdraw the unutilized amount from the deposit account, and

c. Is it possible to take back the exemption given u/s 54 in a subsequent year.


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Example 13

y X sells agricultural land in Kolkata for Rs. 44,73,960 on July1, 2009, which was purchased by him in 1982-83 for Rs.6,80,000. On July 13, 2009 he purchases agricultural land ofRs. 40,000 in Delhi. On June 30, 2010, he deposits Rs.

3,90,000 in the Deposit Account. Determine the amount ofCapital Gain and exemption u/s 54B.


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Example 14

y On January 2, 2010, X sells gold for Rs. 3,85,000 (cost ofacquisition on March 10, 1994: Rs. 1,05,000). Expenses onpurchase and transfer are Rs. 100 and Rs. 200 respectively.On May 30, 2010, he acquires bonds of National Highway

Authority of India (investment being Rs. 40,000). Thesebonds are redeemable after 42 months. Find out the amountof Capital Gains and amount of exemption u/s 54EC.


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Example 15y X Ltd. Sells the following assets:-

The agricultural land is situated in urban area and used for agriculturalpurpose since 1994. X Ltd. Invests in the following assets during April2010:

y Bonds of National Highway Authority of India (redeemable on

1/06/2013): Rs. 4,00,000y Bonds of Rural Electrification Corporation (redeemable on May 10,

2015): Rs. 5,00,000y Agricultural Land: Rs. 75,000

Particulars Agricultural

Land

Bonus Shares House Property

(Let Out)

Date of Sale 30/11/2009 1/01/2010 25/03/2010

Date of Acquisition 9/05/1993 4/04/1983 6/06/1982

Sales Consideration (Rs.) 9,00,000 2,50,000 6,00,000

Purchase Consideration 70,000 Nil 1,00,000


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Example 16

y X Sells the following long-term capitalassets on 11/01/2010

The due date of filing return of income for the assessment year

2010-11 is 31/07/2010. For claiming exemption u/s 54 and 54EC,X purchases the following assets

Particulars Residential

House

Property

Gold Silver Diamonds

Sale Consideration 3,90,000 8,10,000 2,96,000 6,40,200

Indexed Cost of Acquisition 70,000 1,15,000 1,78,000 4,30,000

Expenses on Transfer 10,000 81,000 6,000 32,000


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.ContAssets Date of

Acquisition

Amount

Rs.

Land (for construction of residential house) 31/03/2010 1,00,000

Bank deposit (for constructing house) 5/08/2010 50,000

Rural Electrification Corporation (redeemable on5/07/2014)

5/07/2010 7,50,000

Bonds of National Highway Authority of India(redeemable on 10/08/2019)

10/07/2010 3,05,000

Find out the amount of Capital Gains chargeable to tax for the

assessment year 2010-11


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Example 17y X sells shares in a private limited company on 10/07/2009 for Rs.

8,05,000 (cost ofacquisition on 15/06/1984: Rs. 60,000, expenseson transfer : Rs. 5,000). On 10/07/2009, he owns one residentialhouse property. To get the benefit of exemption u/s 54F, X depositson 30/07/2010 Rs. 6,00,000 in Capital Gain Deposit Account

Scheme. By withdrawing from the Deposit Account, he purchases aresidential house property at Delhi on 6/07/2011 for Rs. 4,80,000.Ascertain:

y The amount of capital gain chargeable to tax for the assessment year2010-11;

y

Tax tre

atment of the unuti

lized

amount;

y When can he withdraw the unutilized amount; andy What X has to do to ensure that exemption u/s 54F is never taken

back


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Example 18

y X purchases 1,000 non-listed shares in Y ltd. On August 16,1990 for Rs. 8,000. On May 17, 1992, he gets 500 bonusshares. On October 20, 2008 he acquires 1,500 right shares@ Rs. 11 per share. He sells 3,000 shares in Y Ltd. on

February 12, 2010 @ Rs. 110 per share (brokerage on sale:1%)

capital gains new

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